UK economy: A fruitless 2024 or ripe for investment?

Britain's forecasted weak growth and a possible recession next year may deter foreign investors

While economists differ over forecasts for a possible recession in the UK in 2024, businesses say, regardless of the predictions, it will feel like a recession. Getty Images
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At the Global Investment Summit at London's Hampton Court last month, British Prime Minister Rishi Sunak unveiled inward investments worth more than £29 billion which, he said, was a "huge vote of confidence in the future of the UK economy".

While Mr Sunak and his fellow government ministers waxed lyrical about the investment opportunities, particularly in high-tech industries, that the British economy can offer, economists crunching the numbers for the short-term outlook painted a somewhat more subdued picture.

The Organisation for Economic Co-operation and Development (OECD) recently reduced its forecast UK growth rate for 2024 to 0.7 per cent, from a previously predicted 0.8 per cent. It also said Britain would have the slowest gross domestic product growth in the G7 group of nations next year, except for Germany.

"In the United Kingdom, GDP growth is projected to be subdued, with higher fiscal pressure weighing on household disposable incomes, but to improve from 0.5 per cent in 2023 to 0.7 per cent in 2024 and 1.2 per cent in 2025," the OECD said.

The UK's Office for Budget Responsibility agrees with the OECD's 0.7 per cent growth forecast, which is less than half what it was predicting back in March.

Figures from the UK's Office for National Statistics showed Britain's GDP fell by 0.3 per cent in October, which was below economists' forecasts.

"Given the weak performance of productivity in the UK, and a tight labour market, there is limited scope for a significant growth momentum in the medium term, unless things change," Yael Selfin, vice chair and chief economist at KPMG told The National.

Recession or no recession?

At 0.4 per cent growth, the consensus forecast by slightly economists is bleaker than the outlooks of the OBR and the OECD.

KMPG is forecasting 0.3 per cent growth for the UK economy next year while Goldman Sachs predicts 0.6 per cent. However, Morgan Stanley is forecasting a contraction of 0.1 per cent.

The prospect of a technical recession, two consecutive quarters of negative growth, has divided opinion among economists.

"We anticipate continued weak growth next year, but not a recession," Ms Selfin told The National.

"However, this puts the UK economy at a vulnerable position, with any additional shocks potentially tipping it into a recession."

Others are more sure that the UK will slide into a recession in 2024.

"We still think there will be a recession. In fact, that recession may have started in Q4 [fourth quarter] of this year and will run into Q1 [first quarter] of next year," Paul Dales, chief UK economist at Capital Economics, told The National.

"That said, it will be the mildest of mild recessions."

Guy Foster, chief strategist at wealth manager RBC Brewin Dolphin, notes that this time last year economists were talking about a recession in 2023 as a near-certainty, in the event the economy proved more resilient.

"Now, forecasts are improving for 2024 as well," he said.

"If anything, the last year has reminded many forecasters that predicting recessions is a task that has eluded the best-resourced central banks for decades."

Pittance and profit

Recession or no recession, 2024 will feel like "another year of economic weakness", according to analysts at S&P Global.

That is putting it mildly for the likes of Linda Anderson, owner of the The Kitchen Croxley, a small tea and cake shop in Croxley Green on the outskirts of north-west London.

For her business, which is a small tea and cake shop, 2023 was the worst year since opening in 2014. She told The National that myriad issues bore down on the bottom line – from business rates to VAT to employer National Insurance contributions to the cost of ingredients.

"Food inflation is as high as 40 per cent on some ingredients," she said.

"There is a limit to how much we can increase our own prices as customers are already feeling the effect of the cost-of-living crisis.

"Many hospitality owners are handing back their keys and giving up – who can blame them?

"I pay myself a pittance and there is no profit at the end of the year."

Entrepreneurs by their nature tend to be more optimistic than economists, and Ms Anderson is hoping for "some slight improvement" in 2024.

However, she will still have to make serious adjustments to her business, such as reducing the opening hours, potentially laying off staff and taking on the work herself, restricting the choices on the menu and, as a last resort, raising prices.

Patrick Clacy is in much the same boat. He owns and runs And So To Bed, a furniture shop specialising in beds in Oxford. This year has been another year of rising costs for the business.

"I think just about every major cost for me has increased as inflation has been high and has only more recently started to fall," he told The National.

"My margins are lower as it has been difficult to pass on price increases to customers who are themselves struggling with inflationary pressures to their incomes."

With the cost of borrowing predicted to stay higher for longer and the Bank of England's base rate to remain at 5.25 per cent for much of 2024, Mr Clacy made the decision to pay down as much debt as he could.

This was part of a wider strategy of protecting the business from the economic headwinds that economists and politicians are so fond of talking about – basically, he is battening down the hatches.

Next year, he is expecting lower sales. He will not take on new staff and will not replace his delivery van, which he normally would after four years.

"So, I am really going to reduce my outgoings as much as possible and will try to save money where I can as I think that it may be a difficult year," he told The National.

Cost of borrowing

Inflation in the UK at the beginning of 2023 was 10.1 per cent. It had fallen to 3.9 per cent by November, as interest rates rose to 5.25 per cent by August, where they remained, from 3.5 per cent in January.

For Mr Dales, the UK economy is currently beset by "two competing forces".

"First, the fall in inflation means that the cost-of-living crisis is fading and that household incomes will rise during 2024," he told The National.

"Second, the drag from higher interest rates will mean some of those increases in income will need to be spent on debt interest payments.

"Our sense is that the interest rate drag will more than offset the boost from lower inflation during the first half of 2024, before the economy starts to slowly turn the corner in the second half of 2024."

Updated: December 28, 2023, 7:47 AM